EUR Base Rate Weakens Against USD as FOMC Decision Looms

As the Asian session begins, the EUR base rate extends its losses by a minuscule 0.01% against the US Dollar (USD) as market participants prepare for the US Federal Reserve’s decision.

The Greenback stages a comeback propelled by a jump in US Treasury bond yields. The EUR/USD is trading at 1.0677, following Tuesday’s losses of 0.12%.

US Economic Strength and Fed’s Likely Stance

The US 10-year Treasury bond yield skyrocketed to a 16-year high at 4.367%, a headwind for the Euro exchange, which remains close to the 1.0700 figure. Still, it’s set to continue to print losses amidst speculations the Fed would deliver a hawkish hold.

Given that recent data in the United States (US) showed the robustness of the economy, with a hot jobs market, improvement in business activity, and consumer spending expanding – though at a lower rhythm – are reasons for the Fed Chair Powell and Co to keep “at it,” and hold rates higher for longer. Furthermore, last week’s Consumer and Producer Price Index (CPI and PPI) printed higher readings, justifying the need for higher rates.

Besides delivering its monetary policy decision, policymakers would update their economic projections regarding growth, unemployment rate, inflation, and the Federal Funds Rates (FFR). In June, Fed officials expected the FFR to peak at around 5.60%. Despite that, money market futures are pricing the FFR to peak at around 5.46%.

European Central Bank’s Dilemma

Data-wise, a scarce US economic docket revealed housing data, which came mixed. US Building Permits improved compared to July’s 0.1% expansion grew by 6.9%, while Housing Starts plunged -11.3%, beneath the -2.5% contraction estimated.

Across the pond, the Eurozone (EU) economic docket revealed inflation data. The Harmonised Index of Consumer Prices (HICP) for August came at 5.2% YoY, below 5.3% estimates, while core HICP stood at 5.3% unchanged, aligned with estimates.

Recently, some European Central Bank (ECB) officials signalled the ECB would not continue to tighten monetary conditions. Nevertheless, an ongoing economic deceleration in the bloc and a deposit rate at its highest level since the Euro’s inception at 4.00% could bring inflation towards its target.

A poll by Reuters showed that 70 economists commented the ECB is done hiking rates and that the deposit rate would end the year at its current 4.00% level. Although the ECB’s President Christine Lagarde refrained from saying that rates have peaked, money market futures see a 25% chance for additional hiking towards the end of the year.

Given the backdrop, if the Fed delivers a hawkish hold, expect further EUR/USD’s downside; otherwise, the single currency could rally and reclaim the 1.0700 level, with buyers eyeing 1.0800.

Euro Forecast: Technical Outlook

The daily chart portrays an ‘evening star’ in the making, as Tuesday’s candle was an ‘inverted hammer’, which could pave the way for further downside. Yet, upside risks remain, with the 100 EUR to USD close to the 1.0700 figure. A hawkish hold by the Fed could open the door to test the September 14 swing low of 1.0632, followed by the 1.0600 figure ahead of plunging toward Mach’s low of 1.0516. Conversely, a dovish surprise and the EUR swap rates could rally past the September 19 high at 1.0718 and target the 200-day Moving Average (DMA) at 1.0828.

Extra retracement in EUR base rate appears to be losing traction for the time being, note Economist Lee Sue Ann and Markets Strategist Quek Ser Leang at UOB Group.